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TARP Audit Questions Rush to Close Auto Dealers

DETROIT — President Obama’s auto task force pressed General Motors and Chrysler to close scores of dealerships without adequately considering the jobs that would be lost or having a firm idea of the cost savings that would be achieved, an audit of the process has concluded.

The report by Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program of the Treasury Department, said both carmakers needed to shut down some underperforming dealerships. But it questioned whether the cuts should have been made so quickly, particularly during a recession. The report, released on Sunday, estimated that tens of thousands of jobs were lost as a result.

“It is not at all clear that the greatly accelerated pace of the dealership closings during one of the most severe economic downturns in our nation’s history was either necessary for the sake of the companies’ economic survival or prudent for the sake of the nation’s economic recovery,” the report said.

The report does not make any recommendations, and serves more as a review of the process. It does not carry the authority to initiate any corrective action.

But it comes at a politically delicate time for the Obama administration, which is facing skepticism from the public about the strength of the recovery and criticism from Republicans who are seizing on the economy — including the effectiveness of the federal bailout — as an issue heading into the midterm elections.

G.M. and Chrysler, which went through separate six-week stays in bankruptcy protection last year, received a total of $62 billion under the Troubled Asset Relief Program. G.M. repaid $6.7 billion in April, but the remainder of its government debt was converted into a 61 percent equity stake. The Treasury owns 8 percent of Chrysler.

Treasury officials, in a letter of response, said they “strongly disagree” with the report’s conclusions, arguing that the administration’s actions toward G.M. and Chrysler “not only avoided a potentially catastrophic collapse” but also “saved hundreds of thousands of American jobs.”

About a year ago, G.M. informed more than 2,000 dealers that some or all of their franchise agreements would not be renewed in October 2010. Chrysler eliminated 789 dealers, or about a quarter of its network, with less than a month’s notice.

Both carmakers voluntarily rescinded some terminations — 666 at G.M. and 50 at Chrysler — which, the report said, “suggests, at the very least, that the number and speed of the terminations was not necessarily critical to the manufacturers’ viability.”

In addition, a small number of dealerships won the opportunity to be reinstated through an arbitration process created by Congress; that process has only a handful of cases left to consider and is scheduled to be completed by the end of this month.

According to the report, Chrysler estimated it would save $45,500 for every dealership it closed, while G.M. projected a savings of $1.1 million a dealership, largely a result of reduced incentive payments. “The difference in these estimates alone casts doubt on their credibility,” the report said.

Though Chrysler has been criticized by dealers for being more subjective about which dealerships to close, the report concluded that Chrysler was consistent in its decisions, whereas G.M. was not.

G.M., the report said, used more objective guidelines, but its closings appeared more random. For instance, G.M. retained 1,426 dealerships that might have qualified for termination while terminating 41 dealerships “that did not meet any of the objective criteria,” the report said.

The report also criticized the Treasury Department for failing to monitor the process.

Representative Darrell Issa, Republican of California, said in a statement: “This sobering report should serve as a wake-up call as to the implications of politically orchestrated bailouts and how putting decisions about private enterprise in the hands of political appointees and bureaucrats can lead to costly and unintended consequences.”

Although the role that the dealership closings played is debatable, both G.M. and Chrysler have greatly improved their finances in the last year. G.M. expects to report a full-year profit, and Chrysler has projected that it will break even or earn a modest operating profit for 2010.

G.M., in a statement, said it had a “stronger dealership network” since emerging from bankruptcy.

A version of this article appears in print on July 19, 2010, on page B1 of the New York edition with the headline: Audit Questions Speed of Auto Dealership Closings. Order Reprints|Today's Paper|Subscribe